TLDR
- The DeFi lending platform completed liquidation of the Kelp DAO exploiter’s rsETH collateral across Ethereum and Arbitrum networks
- Liquidated assets were transferred to Recovery Guardian, a multi-signature wallet operated by DeFi United
- The recovery initiative is approximately 10% away from securing sufficient ETH to completely restore rsETH backing
- A restraining notice from a US legal firm has placed 30,765 ETH frozen by Arbitrum DAO in legal uncertainty
- Aave’s total value locked has bounced back from $14.2B to surpass $15B
The decentralized lending protocol Aave has successfully liquidated all outstanding rsETH positions controlled by the Kelp DAO exploiter across both the Ethereum mainnet and Arbitrum network. This action represents a critical milestone in DeFi United’s community-driven recovery initiative aimed at restoring rsETH’s collateral backing and compensating affected users.
The liquidated collateral has been routed to the Recovery Guardian, a multisignature wallet under DeFi United’s management. Aave emphasized that the liquidation process did not impact user funds and was completed without activating its Umbrella insurance protection mechanism.
The April 18 security breach involved an exploiter — believed to have connections to North Korean-backed threat actors — who exploited vulnerabilities in Kelp DAO’s LayerZero-integrated bridge infrastructure to illegitimately create 116,500 unbacked rsETH tokens on Ethereum. These fraudulent tokens were subsequently deployed as collateral on major lending platforms including Aave and Compound to extract wrapped Ether.
The security incident saddled Aave with over $190 million in uncollateralized debt and sparked significant capital outflows. The protocol experienced a nearly $12 billion decline in total value locked during the week immediately after the attack.
To execute the liquidations, Aave implemented a governance proposal that temporarily modified the rsETH oracle pricing mechanism. This adjustment created a collateral shortfall in the attacker’s position, enabling the liquidation process to activate. The oracle configuration has been reverted to standard parameters.
Contributions to the DeFi United recovery fund have now surpassed $320 million. According to Thaddeus Pinakiewicz, vice president of research at Galaxy Digital, the fund requires approximately 10% additional ETH to completely eliminate the backing deficit.
Legal Battle Complicates Recovery
A complicating factor has emerged that is delaying the recovery timeline. Arbitrum DAO approved a proposal to freeze 30,765 ETH linked to the exploit, intending to redirect it to DeFi United. However, Gerstein Harrow LLP, a United States law firm, submitted a restraining notice last Friday seeking to prevent that transfer.
The legal firm is pursuing the frozen ETH as compensation tied to terrorism-related court judgments against North Korea. Aave has countered by submitting an emergency motion requesting the restraining notice be dismissed.
Arbitrum DAO community members continue voting on whether to authorize the fund release to DeFi United, with more than 90% of voters supporting the proposal. The voting period concludes on Friday.
Waiting on Stablecoin Commitments
DeFi United remains in discussions awaiting official pledges from stablecoin providers Circle, Ethena, and Frax, alongside Kraken’s Ethereum layer 2 solution Ink.
Pinakiewicz stated these commitments are essential to “get it over the line and plug the hole.”
Aave’s TVL has demonstrated signs of recovery. Data from DefiLlama indicates the protocol rebounded from a bottom of $14.2 billion on April 26 to exceed $15 billion in recent sessions.
Net withdrawals from Aave’s lending markets have moderated throughout the past week. Friday’s conclusion of the Arbitrum DAO governance vote represents a pivotal juncture in determining whether the recovery strategy can achieve full execution.
